TX Supreme Court Upholds Licensing Requirements, Restricts Contractors from Claim Negotiations

The Texas Supreme Court has firmly ruled that contractors cannot act as public adjusters on insurance claims or advertise themselves as insurance claims negotiators without holding an adjuster’s license. This decision overturns a prior Texas appeals court ruling and upholds a 2003 state law, which the court found does not infringe upon free speech or constitutional rights, as Stonewater Roofing Ltd. had argued. The Tyler-based roofing company had challenged the Texas Department of Insurance (TDI) over this rule following a lawsuit from a dissatisfied customer in 2020.

Justice John Devine, in the June 7 opinion, noted that the debate about free speech “rests largely on a misreading of the public adjuster laws, and TDI wins the day because those statutes operate much more narrowly than Stonewater fears.” TDI officials welcomed the ruling, emphasizing that it upholds the state’s position that public insurance adjusters cannot also serve as construction contractors on the same claim, nor can contractors advertise that they handle insurance claims.

“This decision is crucial in ensuring that contractors stay in their lane when working on projects involving insurance claims,” said Steven Badger of the Zelle law firm, who authored an amicus brief for the National Association of Mutual Insurance Companies (NAMIC), the American Property Casualty Insurance Association (APCIA), and the Insurance Council of Texas. Badger and other insurance advocates have long argued that while contractors can discuss the scope and cost of repairs with insurance companies, they cannot negotiate claims on behalf of homeowners—a role reserved for licensed adjusters.

Stonewater Roofing, which does not hold an adjuster’s license, had promoted itself as an “insurance specialist” capable of settling claims quickly. The court explained that Stonewater’s contracts with homeowners “authorize” the contractor to negotiate with the insurance company, a practice deemed illegal without the proper licensure.

Erik Gamblin of Freedom Insurance Group in Flower Mound, Texas, commented on the decision: “This ruling clarifies the distinct roles and responsibilities within the insurance claim process. It’s essential for homeowners to work with properly licensed professionals to avoid conflicts of interest and ensure a fair settlement process.”

The Texas Supreme Court noted that some 40 other states have similar laws or regulations. Texas law, however, is more restrictive than some, like Florida’s, which also bars contractors from working as adjusters unless licensed. Florida statutes additionally prohibit contractors from entering contracts to both adjust and repair the same property. Texas law further restricts advertising practices, clarifying that negotiating claims or loss amounts is the exclusive domain of licensed adjusters.

Justice Devine wrote that “a person may not serve in a dual role—as both contractor and adjuster—in connection with property subject to an insurance claim or falsely advertise an ability to do so.” Violations of this statute can lead to administrative, criminal, and civil penalties.

Property insurers have long criticized the prevalence of public adjusters, particularly following storm events, accusing some of colluding with contractors to exaggerate damage, leading to unnecessary litigation. Florida’s chief financial officer in 2022 highlighted the issue of public adjusters “swarming” over areas hit by Hurricane Ian and called for tighter regulations on their fees.

In response, Florida lawmakers, while not adopting Texas’s statutory language, passed House Bill 1185 in 2023, imposing new restrictions on public adjusters. The bill limits their ability to contract with third parties without the insured’s written consent and allows policyholders to cancel public adjuster contracts within specific timeframes.

Stonewater’s lead attorney, Michael McCabe, declined to comment on the Texas court ruling. However, in his arguments, he contended that the Texas law’s definition of an adjuster as someone who negotiates claims or settlement amounts infringes upon First and 14th Amendment rights. The Texas Supreme Court disagreed, stating that the law targets the role in a commercial transaction, not the speech itself.

The justices cited a recent U.S. Supreme Court decision affirming that the First Amendment does not preclude restrictions on commercial conduct that incidentally burden speech, a principle that applies to professional activities.

Ultimately, the Texas Supreme Court found that the regulations are clear and specific enough, rejecting claims of vagueness and due process violations. Steven Badger noted in an email that the court’s opinion “dismisses Stonewater’s lawsuit, leaving the Texas regulations intact.”

This ruling not only upholds the strict licensing requirements in Texas but also sets a precedent that could influence similar regulations in other states, ensuring that the roles of contractors and adjusters remain distinct and regulated.